Item 1A. Risk Factors.
Investing in our securities involves a high
degree of risk. In addition to the risks related to our business set forth in this Annual Report on Form 10-K and the other information
included and incorporated by reference in this Annual Report on Form 10-K, you should carefully consider the risks described below before
purchasing our securities. Additional risks, uncertainties and other factors not presently known to us or that we currently deem immaterial
may also impair our business operations.
Risks Relating to Our Company
We have incurred net losses every year and
quarter since our inception and anticipate that we will continue to incur net losses in the future.
We are a clinical stage biotechnology pharmaceutical
company that is focused on the discovery and development of medications for the treatment of addictions and related disorders of AUD in
patients with certain targeted genotypes. We have a limited operating history. Investment in biopharmaceutical product development is
highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate
will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We
have no products approved for commercial sale and have not generated any revenue from product sales to date, and we continue to incur
significant research and development and other expenses related to our ongoing operations. To date, we have not generated positive cash
flow from operations, revenues, or profitable operations, nor do we expect to in the foreseeable future. As of December 31, 2025, we had
an accumulated deficit of approximately $90 million and for the year ended December 31, 2025 we had a net loss of approximately $8.0 million.
We expect our research and development expenses
to increase as we continue our clinical development program in the US. Even if we succeed in commercializing our product candidate or
any future product candidates, we expect that the commercialization of our product will not begin until 2027 or later, we will continue
to incur substantial research and development and other expenditures to develop and market additional product candidates and will continue
to incur substantial losses and negative operating cash flow. We may encounter unforeseen expenses, difficulties, complications, delays
and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate
of future growth of our expenses and our ability to generate revenue. Our prior losses and expected future losses have had and will continue
to have an adverse effect on our shareholders’ equity and working capital.
Our independent registered public accounting
firm has expressed doubt about our ability to continue as a going concern.
The report of our independent registered public
accounting firm contains a note stating that the accompanying financial statements have been prepared assuming we will continue as a going
concern. During the year ended December 31, 2025, we incurred a net loss of approximately $8 million and used cash in operations of approximately
$6.5 million. Losses have principally occurred as a result of the research and development efforts coupled with no operating revenue.
Until we begin generating revenue, there is substantial doubt about our ability to continue as a going concern.
We currently have no product revenues and
may not generate revenue at any time in the near future, if at all. Currently, we have no products approved for commercial sale.
We currently have no products for sale and we
cannot guarantee that we will ever have any drug products approved for sale. We and our product candidate are subject to extensive regulation
by the FDA, and comparable regulatory authorities in other countries governing, among other things, research, testing, clinical trials,
manufacturing, labeling, promotion, marketing, adverse event reporting and recordkeeping of our product candidates. Until, and unless,
we receive approval from the FDA or other regulatory authorities for our product candidates, we cannot commercialize product candidates
and will not have product revenues. Even if we successfully develop products, achieve regulatory approval, and then commercialize our
products, we may be unable to generate revenue for many years, if at all. If we are unable to generate revenue, we will not become profitable,
and we may be unable to continue our operations. For the foreseeable future, we will have to fund all of our operations from equity and
debt offerings, cash on hand and grants. In addition, changes may occur that would consume our available capital at a faster pace than
expected, including changes in and progress of our development activities, acquisitions of additional candidates and changes in regulation.
Moreover, preclinical and clinical testing may not start or be completed as we forecast and may not achieve the desired results. Therefore,
we expect to seek additional sources of funding, such as additional financing, grant funding or partner or collaborator funding, which
additional sources of funding may not be available on favorable terms, if at all.
22
We have had limited operations to date and
there can be no assurance that we will be able to execute on our business strategy.
We are a clinical stage company, as such, have
had limited operations to date and need to rely on paid consultants to help us achieve our clinical, regulatory and overall business goals.
We have yet to demonstrate our ability to overcome the risks frequently encountered in our industry and are still subject to many of the
risks common to such enterprises, including our ability to implement our business plan, market acceptance of our proposed business and
lead product, under-capitalization, cash shortages, limitations with respect to personnel, financing and other resources, competition
from better funded and experienced companies, and uncertainty of our ability to generate revenues. There is no assurance that our activities
will be successful or will result in any revenues or profit, and the likelihood of our success must be considered in light of the stage
of our development. In addition, no assurance can be given that we will be able to consummate our business strategy and plans, or that
financial, technological, market, or other limitations may force us to modify, alter, significantly delay, or significantly impede the
implementation of such plans. We have insufficient results for investors to use to identify historical trends. Investors should consider
our prospects in light of the risk, expenses and difficulties we will encounter as an early stage company. Our revenue and income potential
is unproven and our business model is continually evolving. We are subject to the risks inherent to the operation of a new business enterprise,
and cannot assure you that we will be able to successfully address these risks.
We will need to secure additional financing
in order to support our operations and fund our current and future clinical trials. We can provide no assurances that any additional sources
of financing will be available to us on favorable terms, if at all. Our forecast of the period of time through which our current financial
resources will be adequate to support our operations and the costs to support our general and administrative, selling and marketing and
research and development activities are forward-looking statements and involve risks and uncertainties.
If we do not succeed in raising additional funds
on acceptable terms, we may be unable to complete planned product development activities or obtain approval of our product candidate from
the FDA and other regulatory authorities. We do not have any committed sources of capital. Moreover, if our future trial activities are
significantly delayed due to pandemics or unrest, our project cost and operating overhead costs may significantly increase. In such case,
we would need to obtain additional funding, either through other grants or through potentially dilutive means. In any case, we will need
to raise additional capital to complete our development program and to meet our long-term business objectives.
Our cash and cash equivalents at the date of filing
this Annual Report on Form 10-K are not expected to be sufficient to fund our operations for the next twelve months. Given current expectations,
we will require additional financing as we continue to execute our business strategy. Though we have recently received total net proceeds
of approximately $8.5 million from equity sales and warrant exercise fees, we have determined to use these additional funds to accelerate
our development of AD04. Moreover, we will require additional funds in order to continue operations and for additional clinical trials
of AD04, if needed, as well as any additional clinical trials or other development of any products we may acquire or license. Our liquidity
may be negatively impacted as a result of a research and development cost increases in addition to general economic and industry factors.
We anticipate that, to the extent that we require additional liquidity, it will be funded through the incurrence of other indebtedness,
additional equity financings or a combination of these potential sources of liquidity. In addition, we may raise additional funds to finance
future cash needs through grant funding and/or corporate collaboration and licensing arrangements. There can be no assurance that the
new administration in the United States will devote significant funds to grants or that any grant money will be available to us. If we
raise additional funds by issuing equity securities or convertible debt, our stockholders will experience dilution. Debt financing, if
available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting
our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. We are in
discussions with potential partners that could fund a Phase 3 clinical program and/or commercialization of AD04 and have entered into
a collaboration framework agreement for commercialization of ADO4 in Europe, assuming a successful regulatory outcome; however, there
can be no assurance that we will be successful in entering into a definitive agreement with Molteni or attracting other partners. If we
raise additional funds through collaboration and licensing arrangements with third parties or third parties obtain commercialization rights,
it may be necessary to relinquish valuable rights to our products, future revenue streams or product candidates or to grant licenses on
terms that may not be favorable to us. Even if we enter into a definitive agreement with Molteni or any other partner or collaborator,
there can be no assurance that we will receive any royalty or milestone payments from our potential collaboration with Molteni or any
other partner or collaborator. The covenants under future credit facilities may limit our ability to obtain additional debt financing.
We cannot be certain that additional funding will be available on acceptable terms, or at all. Any failure to raise capital in the future
could have a negative impact on our financial condition and our ability to pursue our business strategies.
23
Additional financing, which is not in place at
this time, may be from the sale of equity or convertible or other debt securities in a public or private offering, from a credit facility
or strategic partnership coupled with an investment in us or a combination of both. Our ability to raise capital through the sale of equity
may be limited by the various rules of the SEC and The Nasdaq Capital Market (the “Nasdaq”), which place limits on the number
of shares of stock that may be sold. Equity issuances would have a dilutive effect on our stockholders. We may be unable to raise sufficient
additional financing on terms that are acceptable to us, if at all. Our failure to raise additional capital and in sufficient amounts
may significantly impact our ability to expand our business. For further discussion of our liquidity requirements as they relate to our
long-term plans, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity
and Capital Resources.”
In the past we have identified material
weaknesses in our internal controls, and we cannot provide assurances that additional material weaknesses will not occur in the future.
As a public company, we are subject to the reporting
requirements of the Exchange Act, and the Sarbanes-Oxley Act. We expect that the requirements of these rules and regulations will continue
to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and
place significant strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among other things,
that we maintain effective disclosure controls and procedures, and internal controls over financial reporting.
In the past we have identified material weaknesses
in our internal control over financial reporting, which have recently been remediated. A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement
of our financial statements will not be prevented or detected on a timely basis. The material weaknesses that were recently remediated
include (i) lack of formal risk assessment under COSO framework (ii) policies and procedures which are not adequately documented, (iii)
lack of proper approval processes, review processes and documentation for such reviews, (iv) insufficient GAAP experience regarding complex
transactions and ineffective review processes over period end financial disclosure and reporting (v) deficiencies in the risk assessment,
design and policies and procedures over information technology (“IT”) general controls, and (vi) insufficient segregation
of duties.
Our current controls and any new controls that
we develop may become inadequate because of changes in conditions in our business, including increased complexity resulting from our
international expansion. Further, weaknesses in our disclosure controls or our internal control over financial reporting may be discovered
in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement,
could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial
statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting could also adversely
affect the results of management reports. Ineffective disclosure controls and procedures, and internal control over financial reporting
could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect
on the market price of our common stock.
Our independent registered public accounting
firm has not been required to audit the effectiveness of our internal control over financial reporting since we were, until December
31, 2023, an “emerging growth company” as defined in the JOBS Act and are now a smaller reporting company with annual revenue
under $100 million and public float under $700 million. However, if we meet other requirements, our independent registered public accounting
firm may be required to issue a report that is adverse in the event it is not satisfied with the level at which our internal control
over financial reporting is documented, designed or operating. Any failure to maintain effective disclosure controls and internal control
over financial reporting could have a material and adverse effect on our business and operating results, and cause a decline in the market
price of our common stock.
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We rely on a license to use various technologies
that are material to our business and if the agreement were to be terminated or if other rights that may be necessary or we deem advisable
for commercializing our intended products cannot be obtained, it would halt our ability to market our products and technology, as well
as have an immediate material adverse effect on our business, operating results and financial condition.
Our prospects are significantly dependent upon
the UVA LVG License. The UVA LVG License grants us exclusive, worldwide rights to certain existing patents and related intellectual property
that covers AD04, currently our only product candidate. If we breach the terms of the UVA LVG License, including any failure to make minimum
royalty payments required thereunder or failure to reach certain developmental milestones and completion of deadlines, including, submitting
an NDA by March 31, 2028 and commencing commercialization of an FDA approved product by March 31, 2029, or other factors, including but
not limited to, the failure to comply with material terms of the Agreement, the licensor has the right to terminate the license. As a result of our ongoing business and clinical development planning
for AD04, we are approaching UVA LVG to extend the milestones referenced in our license agreement with UVA. If we
were to lose or otherwise be unable to maintain this license on acceptable terms, or find that it is necessary or appropriate to secure
new licenses from other third parties, we would not be able to market our products and technology, which would likely require us to cease
our current operations which would have an immediate material adverse effect on our business, operating results and financial condition.
Our business is dependent upon the success
of our lead product candidate, AD04, which requires significant additional clinical testing before we can seek regulatory approval and
potentially launch commercial sales.
Our business and future success depends upon our
ability to obtain regulatory approval of and then successfully commercialize our lead investigational product candidate, AD04 and other
product candidates. AD04 is in clinical stage development. AD04 currently, as well as any potential future product candidates, will require
additional clinical and non-clinical development, regulatory review and approval in multiple jurisdictions, substantial investment, access
to sufficient commercial manufacturing capacity and significant marketing efforts before we can generate any revenue from product sales.
To date, our main focus and the investment of a significant portion of our efforts and financial resources has been in the development
of our lead investigational product candidate, AD04, for which we recently completed the ONWARD Phase 3 clinical trial with 302 patients
in Scandinavia and Central and Eastern Europe, which targets the reduction of risk drinking (heavy drinking of alcohol) in subjects that
possess selected genetics of the serotonin transporter and/or 5-HT3 receptor gene. We currently plan to conduct two additional Phase
3 clinical trials, as historically expected by FDA, as well as one or more supportive clinical studies to gain approval in either the
U.S. or outside the US for AUD and additional development activity, including, without limitation, clinical trials, in order to seek
approval for the use of AD04 to treat any other indications (e.g., such as opioid use disorder, gambling addiction, smoking cessation,
and other drug addictions). In a recent article, published on February 19, 2026 in The New England Journal of Medicine, the FDA leadership
has outlined a shift in the agency’s default evidentiary posture under which, where scientifically appropriate, approval may be
supported by one adequate and well-controlled clinical trial plus confirmatory evidence, rather than the historic expectation of two
independent clinical trials. Hence, it is possible that we may conduct only one additional Phase 3 clinical trial of AD04. Even though
we are pursuing a registration pathway based on specific FDA input and guidance and the EMA precedents and guidance, there are many uncertainties
known and unknown that may affect the outcome of the trial. These include adequate patient enrollment, adequate supply of our product
candidate, potential changes in the regulatory landscape, and the results of the trial being successful. In addition, because AD04 is
our most advanced product candidate and there is limited history information on long-term effects of our proposed dosage, there is always
a chance of developmental delays or regulatory issues or other problems arising, with our development plans and depending on their magnitude,
our business could be significantly harmed. In any case, the costs associated with completion of any additional Phase 3 trials, commercialization
of AD04, and the costs of developing AD04 for use in other indications are significant and will require obtaining funding, possibly through
equity sales, before AD04 generates revenue.
Our future success depends heavily on our ability
to successfully manufacture, develop, obtain regulatory approval, and commercialize AD04, which may never occur. We currently generate
no revenues from our product candidate, and we may never be able to develop or commercialize a marketable drug.
25
The active ingredient of our product candidate,
ondansetron, is currently available in generic form.
Ondansetron, the active pharmaceutical ingredient
(“API”) of AD04, was granted FDA approval as Zofran® in January 1991 and is approved in many foreign markets.
Ondansetron is commercially available in generic form, but not available: (i) at the formulation/dosage levels expected to be marketed
by us, or (ii) with a requirement to use a diagnostic biomarker, as we expect to be the case with AD04. Although ondansetron has been
approved to treat nausea and emesis it has not been approved to treat AUD and it has not been approved for daily long-term use as planned
by us. Clinical testing to date of ondansetron at the higher doses used to treat nausea/emesis have not shown effectiveness in treating
AUD or any other addictive disorder; however, if a third party conducted a Phase 3 clinical program and showed success treating AUD at
those doses, we could not prevent such third party from marketing ondansetron for AUD at those doses.
Results from clinical studies suggest that high
intravenous doses of ondansetron may affect the electrical activity of the heart. In a Drug Safety Communication dated June 29, 2012,
the FDA stated that: “A 32 mg single intravenous dose of ondansetron (Zofran, ondansetron hydrochloride, and generics) may affect
the electrical activity of the heart (QT interval prolongation), which could pre-dispose patients to develop an abnormal and potentially
fatal heart rhythm known as Torsades de Pointes.” In addition: “No single intravenous dose should exceed 16 mg.” There
are also several recent lawsuits claiming that Zofran® used for the unapproved use of morning sickness causes birth defects.
Although we do not believe that our dosage will cause such adverse event there can be no assurance that the negative side effects of the
generic drug that have been found in higher dosages will not occur in our dosage or otherwise deter potential users of our product candidate
and adversely impact sales of our product candidate. If we were to be required to have such a warning on our drug label, patients may
be deterred from using our product candidates.
In addition, we also face the risk, that doctors
will prescribe off label, the generic form of ondansetron to treat AUD despite the different dosage of ondansetron in the generic form
from that in AD04, the lack of demonstrated clinical efficacy against AUD at the currently available doses (i.e., the Zofran ®
and approved generics), and the potential safety concerns if the currently available/higher doses are taken chronically as would be needed
for AUD or other addictions. Physicians, or their patients, could divide the lowest dose existing oral tablet into more than ten parts
to approximate the necessary AD04 dosage.
Although we believe that any attempt by competitors
to reformulate and market ondansetron at our intended dosage levels, while technically feasible, infringes on our intellectual property
rights, and should, accordingly, be actionable, we cannot give assurances that we would be successful in defending our rights or that
we will have access to sufficient funds necessary to successfully prosecute any such violations of, or infringements on, our intellectual
property rights. Additionally, we cannot ensure investors that other companies will not discover and seek to commercialize low doses of
ondansetron, not currently available, for other indications.
Changes in general economic conditions,
geopolitical conditions, domestic and foreign trade policies, monetary policies and other factors beyond our control may adversely impact
our business and operating results.
Our operations and performance depend on global,
regional and U.S. economic and geopolitical conditions. General worldwide economic conditions have experienced significant instability
in recent years including the recent global economic uncertainty and financial market conditions.
The uncertain financial markets, disruptions in
supply chains, mobility restraints, and changing priorities as well as volatile asset values could impact our business in the future.
Any pandemic will likely have a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred;
supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical
services and supplies, have spiked, while demand for other goods and services, such as travel, have fallen. We expect the same will be
true for any other pandemic. The future progression of the pandemic and its effects on our business and operations are uncertain. In addition,
the outbreak of a pandemic could disrupt our operations due to absenteeism by infected or ill members of management or other employees,
or absenteeism by members of management and other employees who elect not to come to work due to the illness affecting others in our office
or laboratory facilities, or due to quarantines. Pandemics could also impact members of our Board of Directors resulting in absenteeism
from meetings of the directors or committees of directors, and making it more difficult to convene the quorums of the full Board of Directors
or its committees needed to conduct meetings for the management of our affairs.
Further, due to increasing inflation, operating
costs for many businesses including ours have increased and, in the future, could impact demand or pricing manufacturing of our drug candidates
or services providers, foreign exchange rates or employee wages. Inflation rates, particularly in the United States, have increased
recently to levels not seen in years, and increased inflation may result in increases in our operating costs (including our labor costs),
reduced liquidity and limits on our ability to access credit or otherwise raise capital. In addition, the Federal Reserve has raised,
and may again raise, interest rates in response to concerns about inflation, which coupled with reduced government spending and volatility
in financial markets may have the effect of further increasing economic uncertainty and heightening these risks.
26
Actual events involving reduced or limited liquidity,
defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services
industry or the financial services industry generally, or concerns or rumors about any events of these kinds, have in the past and may
in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley Bank, was closed by the California
Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation as receiver. Although
we did not have any cash or cash equivalent balances on deposit with Silicon Valley Bank, uncertainty and liquidity concerns in the broader
financial services industry remain and the failure of Silicon Valley Bank and its potential near- and long-term effects on the biotechnology
industry and its participants such as our vendors, suppliers, and investors, may also adversely affect our operations and stock price.
We are actively monitoring the effects these disruptions
and increasing inflation could have on our operations.
These conditions make it extremely difficult for
us to accurately forecast and plan future business activities.
While there exists a large body of evidence
supporting the safety of our primary API, ondansetron, under short-term use, there are currently no long-term use clinical safety data
available.
We intend to market our products, particularly
AD04, for long-term use by patients seeking to reduce their number of days of heavy drinking, and we assume future sales volumes reflecting
such extended use.
Studies of Zofran® conducted as
part of its FDA and other regulatory agencies review process found that the drug is well-tolerated and results in few adverse side effects
at dosages almost 100 times the dosage expected to be formulated in AD04. However, to the best of our knowledge, no comprehensive clinical
study has been performed to date that has evaluated the safety profile of ondansetron for long-term use. We expect the FDA will require
us to provide safety data in at least 100 patients for 12 months and can offer no assurances that safety results of these long term use
studies will lead to any subsequent approval for long-term use. There can be no assurance that long-term usage of ondansetron, at dosages
anticipated by us, will be safe. Though the FDA has stated it will not require additional non-clinical testing nor will it require a QT
interval prolongation clinical study, such statements by the FDA are not legally binding on the agency.
The current data for our lead product candidate,
AD04 are the result of Phase 2 clinical trials conducted by third parties as well as data generated from the ONWARD trial we conducted
and do not currently provide sufficient evidence that our products are viable as potential pharmaceutical products.
Through our proprietary access to relevant laboratory
and clinical trial results of the University of Virginia’s research program, and through our reliance on publicly available third-party
research, we possess toxicology, pharmacokinetic, and other preclinical data and clinical data on AD04. As of now, AD04 has completed
only Phase 2 clinical trials and one Phase 3 trial. There is no guarantee that Phase 2 results can or will be replicated by additional
pivotal Phase 3 studies.
To date, long-term safety and efficacy have not
yet been demonstrated in clinical trials for our investigational product candidate. Favorable results in early studies or trials may not
be repeated in later studies or trials. Even if our clinical trials are initiated and completed as planned, we cannot be certain that
the results will support our product candidate claims. Success in preclinical testing and early clinical trials does not ensure that later
clinical trials will be successful. We cannot be sure that the results of later clinical trials would replicate the results of prior clinical
trials and preclinical testing, nor that they would satisfy the requirements of the FDA or other regulatory agencies. Clinical trials
may fail to demonstrate that our product candidate is safe for humans and effective for indicated uses. Preclinical and clinical results
are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals or commercialization. Any
delay in, or termination of, our clinical trials would delay our obtaining FDA or other global regulatory approval for the affected product
candidate and, ultimately, our ability to commercialize that product candidate.
On July 20, 2022, we announced the results from
the ONWARDTM Phase 3 trial. Although the trial missed the primary endpoint, it did show statistical significance in a pre-defined
patient group. AD04 patients, compared with placebo patients, achieved a statistically significant reduction from baseline at month six
in percentage of heavy drinking days (PHDD) for the pre-specified patient group of heavy drinkers. across all genotypes combined (avg.
<10 drinks per drinking day at baseline; p=0.03), which accounted for approximately two-thirds of the trial population. A similar trend
was seen in the combined month five and six analysis in the reduction from baseline (p =0.07). Notably, in the last month of the trial,
AD04 heavy drinking patients had a mean reduction of approximately 79% in heavy drinking compared with baseline.
27
Compared with placebo patients, AD04 patients
in the heavy drinking group had an overall significant difference in the severity of their AUD diagnosis (p=0.04) under the Diagnostic
and Statistical Manual of Mental Disorders, Fifth Edition (DSM-5). For the group of those who no longer meet AUD criteria (<2 symptoms),
the comparisons were 27.4% vs. 14.9% (i.e., an 84% decrease), of AD04 and placebo patients, respectively. These data underscore the clinical
relevance of the findings that heavy drinking AUD patients that receive AD04 appear more likely to recover from the disease by the end
of the treatment regimen.
Additionally, and consistent with the Phase 2b
trial, AD04 had a safety and tolerability profile that was similar to placebo. No side effects or severe adverse events (SAEs) were determined
to be related to AD04 treatment. In fact, more SAEs were reported in the placebo group compared with the AD04 group (7 on placebo vs.
3 on AD04). There were two cardiac events in placebo group and none in the AD04 group. Comparing overall Adverse Events (AEs), the profiles
between AD04 and placebo were similar. AEs reported with a frequency of 5% or more of patients in either group were: headache (11% on
placebo, 12% on AD04), insomnia (3% on placebo, 7% on AD04), blood magnesium decreased (5% on placebo, 6% on AD04), and fatigue (3% on
placebo, 6% on AD04). All of the AE’s were reported as mild to moderate. Importantly, in the overall category of cardiac disorders,
patients on placebo showed a greater number of adverse events compared to AD04 (7% on placebo, 4% on AD04), in addition to greater number
of cardiac SAEs in the placebo group as reported above.
As a result of the above clinical trials, Adial
will have to conduct additional clinical trials to meet US and global regulatory requirements for approval, and no assurance can be given
that the results of any additional trials will provide support for commercialization of AD04.
The FDA and/or other global regulators may
not accept our planned Phase 3 endpoints for final approval of AD04 and may determine additional clinical trials are required for approval
of AD04.
The FDA has indicated to us at the July 2025 EOP2
meeting that a comparison of the percent of patients with no heavy drinking days in the last two months of a six month clinical trial
between the drug and placebo groups will be a satisfactory endpoint for determination of a successful Phase 3 trial of AD04. In February
2025, the FDA Center for Drug Evaluation and Research (CDER) published a qualifying tool to support the development of treatments for
alcohol use disorder. This new tool is based on a two-level reduction in risk drinking level of alcohol consumption and was validated
as a clinically meaningful endpoint. The new endpoint provides an option for researchers and drug developers alongside abstinence and
no heavy drinking days. With this qualification, investigators can now determine if their proposed treatment works as they expect based
on whether it reduced risk drinking level (RDL). The new tool is alongside the draft guidance Alcoholism: Developing Drugs for Treatment
Guidance for Industry dated February 2015 indicating this endpoint for the development of drugs for AUD. Similarly, the EMA has in
the past accepted the co-primary endpoints of reduction from baseline in days of heavy drinking and reduction total grams of alcohol consumed
per month and has published the Guideline on the development of medicinal products for the treatment of alcohol dependence, .
Despite these developments we, however, can offer no assurance that the FDA or EMA will approve our primary endpoints, that we can achieve
success at any endpoints they do approve, or that these potential benefits will subsequently be realized.
We will incur additional costs and our approvals
could be delayed if the FDA or other global regulators requires additional clinical trials in patients that are negative for the genotypes
targeted by AD04. In addition, clinical trials conducted with only genotype positive subjects will likely result in labeling restricted
to treating patients that are genotype positive.
Although the FDA has indicated that it sees little
evidence of positive effects for the use of AD04 in subjects that are negative for the genotypes targeted by AD04, the FDA has indicated
that some research in this area may be required prior to approval of AD04 for AUD within the marker negative population. We believe data
in genotype negative patients will be needed to satisfy FDA requirements, and necessary for approval of the genetic test with CDRH. Our
current planning assumption is to conduct one Phase 3 trial with an adaptive enrichment trial design, one subsequent confirmatory Phase
3 trial and one open label extension safety study. These assumptions may change based on the recent shift in the FDA’s evidentiary
posture to potentially provide approval based on one adequate and well-controlled clinical trial plus confirmatory evidence, rather than
the historic expectation of two independent clinical trials ongoing discussions with regulatory authorities, and final trial designs and
results. It is possible that we may conduct only one additional Phase 3 clinical trial of AD04. We expect the label for AD04 to be restricted.
If the results of such studies are not positive for AD04, it may result in AD04 not being approved.
28
Under the Pediatric Research Equity Act (“PREA”),
NDAs or supplements to NDAs must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant
pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective.
We plan to test AD04 in adolescent patients (ages 12-17) as part of our next Phase 3 trial. If successful, we intend to request labeling
for treating adolescent patients. Under PREA, an applicant may request and be granted a waiver based on meeting specific criteria as outlined
in guidance published in February 2023.
Our use of the currently manufactured clinical
trial material in the planned Phase 3 trial is dependent upon the review and approval of the relevant regulatory agencies and authorities.
The Company has manufactured additional clinical
trial material for use in the other studies that may be required by the FDA or EMA. No assurance can be given that the CMC plan developed
by us will be satisfactory to the regulatory agencies or that the clinical trial material produced for use in clinical trials of AD04
will be approved for use in the trials, either of which could result in delay of the clinical trial program and a requirement for increased
investment prior to commencement of clinical trials.
Our investigational product, AD04, is dependent
on a successful development, approval, and commercialization of a genetic test, which is expected to be classified as a companion diagnostic.
Treatment with AD04 will be dependent on identification
of patients with a genetic test (i.e., a companion diagnostic). Companion diagnostics and complementary diagnostics are regulated as medical
devices by the FDA and, as such, require either clearance or approval prior to commercialization. While the technology for the test we
plan to use is well established, it cannot be certain the testing laboratory we set up will be able to conduct the test with the selectivity
and sensitivity that will be required or that the genetic test will be approved by FDA for such use, which could increase the time and
cost to develop AD04 and possibly prevent marketing approval. While we have been party to a joint meeting with the Center for Drug Evaluation
and Research (“CDER”, the FDA division responsible for drug approvals) and the CDRH, the FDA division responsible for device
approvals, including genetic tests) at which agreement was reached as to the development path for the genetic test, neither CDER nor CDRH
is bound to accept our planned submission package even if the data is positive. We expect to need approval of a PMA or a 510(k) from CDRH
for the companion diagnostics to be used with the drug product. We have collected and are storing additional blood samples from all patients
enrolled in the ONWARD Phase 3 trial, and plan to do so for any future trials that may be conducted, in the event of any difficulties,
however, we cannot be certain we can overcome all of the technological, logistical or regulatory hurdles related to the genetic testing,
which include, without limitation, technical validation of the test (e.g. specificity, sensitivity, reproducibility, robustness of methods),
clinical validation acceptable to CDER and CDRH, all of which are needed for approval of AD04 and its companion diagnostic genetic test.
Failure in any of these areas could delay approval of AD04, increase the cost necessary to achieve approval of AD04 or prevent approval
of AD04.
If we obtain approval of AD04 and its genetic
test, we currently plan to distribute the genetic test through an approved third party clinical testing lab partner in order to achieve
wider availability of the genetic test to drive market uptake of AD04. However, we cannot be sure that third party testing companies will
be willing to provide the test, that reimbursement for the test will be available to make such business profitable, or that taking a genetic
test will be acceptable to patients or physicians.
In November 2025, the FDA published a CDx reclassification
order proposing that nucleic-acid based test systems, e.g. PCR and NGS tests should be reclassified to Class II (rather than Class III)
and these tests can leverage a 510(k) regulatory pathway (less burdensome regulatory pathway than a DeNovo or PMA). The FDA has requested
comments on these reclassification orders. While these orders, if approved, could streamline the regulatory burden and impact on the genetic
test development, there are no guarantees that these orders will be approved or even approved as proposed and could change in the future.
Our product candidate will require extensive
clinical and other testing.
Our product candidate will require extensive clinical
and other testing. Although our product candidate has completed a 283-patient Phase 2 clinical trial and has also completed an initial
302-patient Phase 3 clinical trial, we anticipate completing two additional Phase 3 clinical trials in order to obtain regulatory approval
and therefore cannot predict with any certainty if or when we might submit an application for regulatory approval for any of our product
candidates or whether any such application will be accepted for review by the FDA or other global regulators, or whether any application
will be approved upon review. Given the recent shift in the FDA’s evidentiary posture to potentially provide approval based on one
adequate and well-controlled clinical trial plus confirmatory evidence, rather than the historic expectation of two independent clinical
trials, it is possible that we may conduct only one additional Phase 3 clinical trial of AD04.
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Even if our clinical trials are completed as planned,
we cannot be certain that their results will support our proposed indications. Success in preclinical testing and early clinical trials
does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate
the results of prior clinical trials and preclinical testing. Results from earlier clinical trials may not be repeated in later clinical
trials. The clinical trial process may fail to demonstrate that our product candidate is safe and effective for their proposed uses. This
failure could cause us to abandon our product candidate and may delay development of other product candidates. Any delay in, or termination
of, our clinical trials will delay and possibly preclude the filing of any NDAs with the FDA or other global regulators and, ultimately,
our ability to commercialize our product candidate and generate product revenues.
Our clinical trials may fail to demonstrate
adequately the safety and efficacy of AD04 or any future product candidates, which would likely prevent or delay regulatory approval and
commercialization.
Before obtaining regulatory approvals for the
commercial sale of AD04 or any future product candidates, including AD04, we must demonstrate through lengthy, complex and expensive preclinical
testing and clinical trials that product candidates are both safe and effective for use in each target indication. Clinical testing is
expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical
trial process. The results of preclinical studies and early and even later stage clinical trials of product candidates may not be predictive
of the results of later-stage clinical trials. Results from subsequent clinical trials may not be the same as the results from the Phase
2b clinical trial that was conducted by the University of Virginia or the results of our Phase 3 trial. There is typically an extremely
high rate of attrition from the failure of product candidates proceeding through clinical trials. Product candidates in later stages of
clinical trials may fail to show the desired safety and efficacy profile despite having progressed through preclinical studies and initial
clinical trials. A number of companies in the biopharmaceutical industry have suffered significant setbacks in advanced clinical trials
due to lack of efficacy or unacceptable safety issues, notwithstanding promising results in earlier trials. We can make no assurances
that, should our future Phase 3 studies provide statistically significant and clinical meaningful results evidencing that treatment with
AD04 results in reduced days of heavy drinking or abstinence, these same results will also provide evidence of greater patient efficacy
rates and or patient benefit ratios vis-à-vis currently marketed drug treatments. Most product candidates that commence clinical
trials are never approved as products.
In addition, even if the trials are successfully
completed, we cannot guarantee that the FDA or foreign regulatory authorities will interpret the results as we do, and more trials could
be required before we submit product candidates for approval. To the extent that the results of the trials are not satisfactory to the
FDA or foreign regulatory authorities for support of a marketing application, approval of product candidates may be significantly delayed,
or we may be required to expend significant additional resources, which may not be available to us, to conduct additional trials in support
of potential approval of product candidates.
If we experience delays in the enrollment
of patients in our clinical trials our receipt of necessary regulatory approvals could be delayed or prevented.
We currently plan to conduct two, additional Phase
3 clinical trials in order to obtain regulatory approval and therefore our inability to locate and continue to enroll a sufficient number
of eligible patients in any future clinical trials would result in significant delays or may require us to abandon one or more clinical
trials. Given the recent shift in the FDA’s evidentiary posture to potentially provide approval based on one adequate and well-controlled
clinical trial plus confirmatory evidence, rather than the historic expectation of two independent clinical trials, it is possible that
we may conduct only one additional Phase 3 clinical trial of AD04. Retention of subjects in clinical trials related to AUD can be challenging
relative to trials in some other indications due to the nature of the target population. Our ability to enroll patients in trials is affected
by many factors out of our control including the size and nature of the patient population, the proximity of patients to clinical sites,
the eligibility criteria for the trial, the design of the clinical trial, the prevalence and successful recruiting of patients that are
genotype positive, competing clinical trials, and clinicians’ and patients’ perceptions as to the potential advantages of
the drug being studied in relation to other available therapies, including any new drugs that may be approved for the indications we are
investigating. Due to the use of a biomarker to determine enrollment in our current and planned Phase 3 clinical trials, we will have
a limited population of patients to draw from for our Phase 3 clinical trials.
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Our success will be dependent upon adoption
by physicians and others.
Even if the FDA and/or EMA approves our product
candidate or any future product candidates we may develop or acquire, the product will require acceptance among physicians, healthcare
payers, patients, and the medical community. Our product is to be used in combination with a genetic test targeted at patients with certain
specified genotypes. It is anticipated that physicians will recommend patients for screening prior to administration of AD04 or future
product candidates. Therefore, our business will be substantially dependent upon our ability to communicate with and obtain support from
physicians regarding the benefits of our products relative to alternative treatments available at that time.
Rapid technological change and substantial
competition may impair the business.
The pharmaceutical industry is subject to rapid
and substantial technological change. Technological competition in the industry from pharmaceutical and biotechnology companies, universities,
governmental entities, and others diversifying into the field is intense and is expected to increase. Many of these entities have significantly
greater research and development capabilities, as well as substantially more marketing, financial, and managerial resources than we do,
and represent significant competition. Acquisitions of, or investments in, competing biotechnology companies by large pharmaceutical companies
could increase these competitors’ financial, marketing, and other resources. We cannot assure you that developments by others will
not render our products or technologies noncompetitive or that we will be able to keep pace with technological developments. Competitors
have developed, or are in the process of developing, technologies that are, or in the future may be, the basis for competitive products.
Some of these products may have an entirely different approach or means of accomplishing similar therapeutic endpoints than products we
are currently developing. These competing products may be more effective and less costly than the products that we are developing. In
addition, conventional behavioral therapies and other treatment approaches currently in use today may continue to be used instead of,
rather than in conjunction with, our products.
Any product that we successfully develop, and
for which we gain regulatory approval, must compete for market acceptance and market share. Accordingly, important competitive factors,
in addition to completion of clinical testing and the receipt of regulatory approval, will include product efficacy, safety, timing, and
scope of regulatory approvals, availability of supply, marketing and sales capability, reimbursement coverage, pricing, and patent protection.
Existing or future competing products may provide greater therapeutic convenience or clinical or other benefits for a specific indication
than our products, or may offer comparable performance at a lower cost. If our products fail to capture and maintain market share, we
may not achieve sufficient product revenues and our business will suffer.
We will compete against fully integrated pharmaceutical
companies such as Alkermes and Indivior and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions,
government agencies and other public and private research organizations. Many of these competitors have drugs already approved or in development.
In addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development
programs or have substantially greater financial resources than we do, as well as significantly greater experience in:
● developing drugs, and other therapies;
● undertaking preclinical testing and clinical trials;
● formulating and manufacturing drugs, biologics and other therapies; and
● launching, marketing and selling drugs, and other therapies.
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Risks Relating to Our Business and Industry
If we do not obtain the necessary regulatory
approvals in the United States and/or other countries, we will not be able to sell our product candidates.
We cannot assure you that we will receive the approvals
necessary to commercialize AD04 or any future product candidates we acquire or develop in the future. We will need FDA approval to commercialize
our product candidates in the United States and approvals from the FDA-equivalent regulatory authorities in foreign jurisdictions to commercialize
our product candidates in those jurisdictions. In order to obtain FDA approval of any product candidate, we must submit to the FDA an
NDA, demonstrating that the product candidate is safe, pure and potent, and effective for its intended use. This demonstration requires
significant research including preclinical studies, as well as clinical trials. We plan to conduct two additional Phase 3 clinical trials
of AD04 for the treatment of AUD; however, given the recent shift in the FDA’s evidentiary posture to potentially provide approval
based on one adequate and well-controlled clinical trial plus confirmatory evidence, rather than the historic expectation of two independent
clinical trials, it is possible that we may conduct only one additional Phase 3 clinical trial of AD04. Satisfaction of the FDA’s
regulatory requirements typically takes many years, depends upon the type, complexity and novelty of the product candidate and requires
substantial resources for research, development and testing. We cannot predict whether our clinical trials will demonstrate the safety
and efficacy of our product candidates or if the results of any clinical trials will be sufficient to advance to the next phase of development
or for approval from the FDA. We also cannot predict whether our research and clinical approaches will result in drugs or therapeutics
that the FDA considers safe and effective for the proposed indications. The FDA has substantial discretion in the approval process.
The approval process may be delayed by changes
in government regulation, future legislation or administrative action, or changes in FDA policy that occur prior to or during our regulatory
review. Factors that might lead to a suspension or termination of a clinical trial include, but are not limited to:
● failure of medical investigators to follow clinical trial protocols;
● unforeseen safety issues; and/or
● lack of adequate funding to continue any clinical trial.
Further, delays in obtaining regulatory approvals
may:
Even if we comply with all FDA requests, the FDA
may ultimately reject one or more of our applications. We may never obtain regulatory clearance for any product candidates. Failure to
obtain FDA approval of any of product candidates will severely undermine our business by leaving us without a saleable product, and therefore
without any source of revenues, until another product candidate can be developed. There is no guarantee that we will ever be able to develop
or acquire another product candidate.
In addition, the FDA may require us to conduct
additional preclinical and clinical testing or to perform post-marketing studies, as a condition to granting marketing approval of a product.
Initial acceptance by the FDA of clinical trial protocols is subject to constant review and any process control failures could result
in additional required testing. Regulatory approval of products often requires that subjects in clinical trials be followed for long periods
to assess their overall survival. The results generated after approval could result in loss of marketing approval, changes in product
labeling, and/or new or increased concerns about the side effects or efficacy of a product. The FDA has significant post-market authority,
including the explicit authority to require post-market studies and clinical trials, labeling changes based on new safety information,
and compliance with FDA-approved risk evaluation and mitigation strategies. The FDA’s exercise of its authority has in some cases
resulted, and in the future could result, in delays or increased costs during product development, clinical trials and regulatory review,
increased costs to comply with additional post-approval regulatory requirements and potential restrictions on sales of approved products
based on labeling or other requirements.
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In foreign jurisdictions, we must also receive
approval from the appropriate regulatory authorities, and pricing authorities, before we can commercialize any candidate products. Foreign
regulatory approval processes generally include all of the risks associated with the FDA approval procedures described above. There can
be no assurance that we will receive the approvals necessary to commercialize our product candidate for sale outside the United States.
Changes in regulatory requirements and guidance
may occur, and we may need to amend clinical trial protocols or our development plan to reflect these changes. Amendments may require
resubmitting clinical trial protocols to FDA and institutional review boards for reexamination, which may impact the costs, timing or
successful completion of a clinical trial. If we experience delays in completion of, or if we terminate any clinical trials, the commercial
prospects for product candidates may be harmed, and the ability to generate product revenues will be delayed. In addition, many of the
factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of
regulatory approval of product candidates.
Obtaining and maintaining regulatory approval
of product candidates in one jurisdiction does not mean that we will be successful in obtaining regulatory approval of product candidates
in other jurisdictions.
Obtaining and maintaining regulatory approval
of product candidates in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory approval in any other
jurisdiction, and a failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory
approval process in others. For example, even if the FDA grants marketing approval of a product candidate, comparable regulatory authorities
in foreign jurisdictions must also approve the manufacturing, marketing and promotion of the product candidate in those countries. Approval
procedures vary among jurisdictions and can involve requirements and administrative review periods different from, and greater than, those
in the United States, including additional preclinical studies or clinical trials, as clinical studies conducted in one jurisdiction may
not be accepted by or sufficient for regulatory authorities in other jurisdictions. In many jurisdictions outside the United States, a
product candidate must be approved for reimbursement before it can be approved for sale in that jurisdiction. In some cases, the price
that we intend to charge for our candidate products is also subject to approval. Additionally, some foreign jurisdictions require participation
of subjects from their country in the Phase 3 trials in order to gain approval in their country.
We intend to also submit marketing applications
in other jurisdictions, including European countries. Regulatory authorities in jurisdictions outside of the United States have requirements
for approval of product candidates with which we must comply prior to marketing in those jurisdictions. Obtaining foreign regulatory approvals
and compliance with foreign regulatory requirements could result in significant delays, difficulties and costs for us and could delay
or prevent the introduction of our products in certain countries. If we fail to comply with the regulatory requirements in international
markets and/or fail to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market
potential of AD04 or any future product candidates will be harmed.
Even if we receive regulatory approval of AD04
or any future product candidates, we will be subject to ongoing regulatory obligations, such as post market surveillance and current good
manufacturing practice (“GMP”) requirements, and continued regulatory review, which may result in significant additional expense.
We may also be subject to penalties if we fail to comply with regulatory requirements or experience unanticipated problems with product
candidates. In addition, third parties on whom we rely must comply with regulatory requirements, and any non-compliance on their part
may negatively impact our business, assuming we obtain regulatory authorization at all.
Any regulatory approvals that we receive for product
candidates will require surveillance to monitor the safety and efficacy of the product candidate. The FDA may also require a Risk Evaluation
and Mitigation Strategy (“REMS”) program in order to approve product candidates, which could entail requirements for a medication
guide, physician communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries
and other risk minimization tools. The FDA could also require a boxed warning, sometimes referred to as a Black Box Warning on the product
label to identify a particular safety risk, which could affect commercial efforts to promote and sell the product. In addition, if the
FDA or a comparable foreign regulatory authority approves product candidates, the manufacturing processes, labeling, packaging, distribution,
adverse event reporting, storage, advertising, promotion, import, export and recordkeeping for product candidates will be subject to extensive
and ongoing regulatory requirements. These requirements include submissions of safety and other post-marketing information and reports,
registration, as well as continued compliance with current GMPs and current good clinical practices (“GCPs”) for any clinical
trials that we conduct post-approval. We are also subject to certain user fees imposed by the regulatory agencies. Later discovery of
previously unknown problems with product candidates, including adverse events of unanticipated severity or frequency, or with our third-party
manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in, among other things:
● fines, warning letters or holds on clinical trials;
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● injunctions or the imposition of civil or criminal penalties.
The FDA’s and other regulatory authorities’
policies may change, such as those required by the 21st Century Cures Act, and additional government regulations may be enacted
that could prevent, limit or delay regulatory approval of AD04 or any future product candidates. In addition, it is unclear what changes,
if any, the new presidential administration may bring. We cannot predict the likelihood, nature or extent of government regulation that
may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to
changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance,
we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability.
Clinical trials are very expensive, time-consuming
and difficult to design and implement.
As part of the regulatory process, we must conduct
clinical trials for each product candidate to demonstrate safety and efficacy to the satisfaction of the FDA and other regulatory authorities.
As we advance AD04 or any future product candidates we expect that our expenses will increase when we commence the two planned Phase 3
clinical trials of AD04 for the treatment of AUD. Given the recent shift in the FDA’s evidentiary posture to potentially provide
approval based on one adequate and well-controlled clinical trial plus confirmatory evidence, rather than the historic expectation of
two independent clinical trials, it is possible that we may conduct only one additional Phase 3 clinical trial of AD04, which would significantly
decrease the additional expenses that we would incur in connection with such clinical trials. The number and design of the clinical trials
that will be required varies depending upon product candidate, the condition being evaluated, current medical strategies and the trial
results themselves. Therefore, it is difficult to accurately estimate the cost of the clinical trials. Clinical trials are very expensive